The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The Lesson of Suddenness

12/06/2020

Take a look at this graph, and you will see how the stock market rebounds after a major bear market, which is defined as a 30% drop.  This has happened six times since 1950.  Looking at the gray line, you can see that, historically, the stock market rose slightly more than 40% on average in the first 250 trading days after the market bottom.

Looking at the orange line, you can see stocks rose slightly more than 60% during the 250 trading days after the bottom of the Great Recession, otherwise known as the Global Financial Crisis.  Now, looking at the blue line, you can see the market is already up 60% over a mere 180 days of this Pandemic Recession or Global Health Crisis.

Almost all major bear markets are associated with recessions.  It is interesting to me that the last two major bear markets were associated with unusually harsh recessions.  One was a global financial crisis, and the other was a global health crisis.  Both happened very suddenly.  The suddenness of a recession increases the severity.

I think the take-away is that sudden bear markets recover more quickly than normal bear markets.

Loosely-paraphrasing the great Warren Buffett, who admitted that he does not know where the stock market will be next month, but he does know where it will be in five years . . . which is UP.

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